1 Company Set to Dominate the Competition

Everyone loves a good David and Goliath story. We get to see the value of perseverance, the little guy triumphing over the big bully, and reinforce our belief that anyone can accomplish their dreams with a bit of hard work and faith. Hooey. The reason we remember David is that he's the exception to the rule. Usually, the little guy steps up, chest puffed out and full of pride, and proceeds to get his teeth kicked in. With Starbucks (NAS: SBUX) stepping up, Green Mountain Coffee (NAS: GMCR) should start investing in mouth guards.

Brew your ownThe battleground is the countertops of middle America. Green Mountain has had a lockdown on single-brew machines for a while, but its relevant patents expired earlier this month. That means that companies like Starbucks can get into the game for themselves, instead of having to sell only coffee through Green Mountain. And since it can, Starbucks has. Yesterday, the company launched the Verismo system, which is a direct competitor to Green Mountain's Keurig brand.

The distinctions are important. While Green Mountain has a number of espresso coffee blends, its machine does not produce enough water pressure to make normal espresso. The Starbucks machine capitalizes on consumers' addiction to the company's lattes by providing the pressure to make espresso drinks at home. That's a big win for Starbucks, and a huge setback for Green Mountain. While Starbucks will continue to sell coffee for the Green Mountain system, you can bet that it will be pushing the Starbucks brand.

With the addition of espresso, Starbucks will now be competing with Nestle's (NASDAQOTH: NSRGY) Nespresso brand. It currently controls about 35% of the global market, and the company plans to launch a new, smaller espresso machine in the U.S. In addition to that old guard, Green Mountain has plans to introduce its own espresso machine, which will launch with Italian espresso company Lavazza. All that action means that Starbucks is going to have a short window in which to really make its mark on consumers before the market is flooded with other options.

The value of being GoliathOne of Starbucks' biggest assets in this early push is its existing cafe network. The company operates over 12,000 stores in its American region, which can now all push the new brewer. And even when the Green Mountain espresso machine comes out, Starbucks will have the upper hand, due to its size and resources. But David has a few tricks up his sleeve, too. Green Mountain already controls about 90% of the brew-at-home market, and is close to being a household name. It also has Starbucks beat on price point, with Keurig machines available for under $100. Starbucks is selling the Verismo for $199.

I think that Starbucks is going to win this race. The value of the brand makes the machines much more attractive to coffee lovers, and the ability to create a latte out of a pod is a big deal. While other companies have tried a similar approach, none of them have had the coffee clout of Starbucks. The Verismo is going to be a big Christmas seller, and I'm guessing that Green Mountain is going to have another inventory surplus come 2013.

Relative size mattersFinally, investors need to keep in mind that this is not a Coca-Cola (NYS: KO) versus SodaStream (NAS: SODA) scenario. The global market for brew-at-home is large and growing quickly. Starbucks has a lot to gain from getting into that market. Last quarter, Green Mountain's revenue was about a quarter of Starbucks', which is no small change. Coke has no need to get into the make-your-own soda craze, because it would represent such a small portion of its current income. Even if Coke had taken every last penny of sales from SodaStream last quarter, it would only have increased revenue by 0.8%. That's not worth chasing.

Starbucks is going to come out on top of this matchup, and it's not going to be a pretty sight. Green Mountain keeps getting kicked around, and the lack of an espresso machine, coupled with its expired patents, puts it on the back foot. While sometimes, David can dig deep and knock one home, this is a case where Goliath just knocks him flat.

But there are people who love Green Mountain and, to be sure, it's priced for decline. You can buy shares for only 11 times forward earnings, whereas Starbucks will set you back 24 times forward earnings. If Green Mountain can pull through, it'll be a big win for the risk takers. Because things are getting so hot and heavy, the Fool has authored a special report on Green Mountain. We give detailed analysis of its current position, and update it as the market changes. You can click here to sign up for your copy today, and keep an eye on this developing story.